The CARES Act and Employer Student Loan Contributions
The CARES Act Section 127 of the IRS code, Student Loan Repayment provision allows employers to contribute up to $5,250 tax-free annually to their employees' student loans and has been extended from the previous deadline of December 31, 2020 to December 31, 2025.
The IRS tax code of 127 was created by congress in 1978 as a temporary, expiring tax benefit allowing employers to provide tax-free assistance to their employees who continued to pursue their education while working. It was made Permanent in 2012.
How did the CARES act make employer student loan repayment tax-free?
The CARES Act of March 2020, congress temporarily added the option for employers to also provide student loan debt relief for its employees. Though mostly known for providing stimulus checks and pausing federal student loans, it also added legislation that would make the employer student loan repayments tax-free until the end of December 2025.
What is Section 2206 of the CARES Act?
The CARES Act Section 2206, allowed the exclusion for certain employer payments of student loans.
(B) in the case of payments made before January 1, 2021, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee, [...].
The enhancements made to section 127 has not been increased in almost 40 years. Sec. 127 was created as a temporary tax benefit in 1978 with the CARES Act of March 2020 could still be made permanent and also expand the annual amount allowable as a tax free employer provided assistance benefit.
What is the Upskilling and Retraining Assistance Act (URA Act)?
The Upskilling and Retraining Assistance Act, also known as the URA Act, is a bill that was reintroduced to Congress May 2021 by U.S. Senators Todd Young (R-Ind.) and Maggie Hassan (D-N.H.), along with Senators Catherine Cortez Masto (D-Nev.) and Tim Scott (R-S.C.). This bill would expand the tax exclusion in CARES act section 127 of the irs code from $5,250 to $12,000 a year for the next two years.
The URA Act is currently awaiting consideration in the Senate Finance Committee's markup process.
Who Can Benefit from the CARES Act Student Loan Repayment provision?
Both employers and employees can benefit. Employers are able to make payments toward employee student loans on a tax-free basis (up to $5,250 annually), which enables employers to enhance recruitment & retention. Employees are able to receive contributions toward student loans on a tax-free basis (up to $5,250 annually) which can help employees pay down student loan balance faster and reduce the payback period of the loan.
Student Loan Tax Exemption Eligibility
As defined by the IRS, the loan institution may be federal or private. Only qualifying loans are eligible for tax-free status through defined Section 127 Plans. For more information, see IRS Publication 15-B Educational Assistance section.
Key Takeaways
Some takeaways for employers looking to take advantage of the new section 127 of the irs tax code improvements:
- Allows employers to subsidize and / or reimburse employee student loan payments
- $5,250 maximum per employee
- Tax deductible for employers, and excluded from taxable income from employee
- Be a legitimate employee of the LLC or S Corp
- Not own more then 5% of the LLC or S Corp
- Not be your dependent
FAQs
The CARES Act and Employer Student Loan Contributions
Can employers offer you tax-free help with your student loan payments? ›
Payments made directly to the lender, as well as those made to the employee, qualify. By law, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year. Normally, assistance provided above that level is taxable as wages.
Why should employers offer student loan repayment? ›
Employers can make contributions toward an employee's student loans or retirement account, reduce their financial stress, and improve workplace productivity and affinity.
Is student loan repayment by employer taxable? ›
Employer educational assistance vs.
According to the IRS, payments made directly to the lender and those made to the employee qualify. This employer-sponsored student loan repayment assistance is tax-free because the IRS doesn't consider the assistance provided by the employer to be taxable income for the employee.
Is there a tax benefit to paying off student loans? ›
Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily prepaid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year.
What is the exclusion for employer payments of student loans? ›
Existing federal law1 provides an exclusion of up to $5,250 per year from gross income of an employee, for educational assistance furnished pursuant to an educational assistance program by an employer, for expenses incurred by, or on behalf of, an employee for education of the employee.
Can my employer pay off my student loans? ›
Currently, employers can provide up to $5,250 in student loan repayment annually as a tax-free benefit for employees. Understanding how these programs work and how to qualify can bring you closer to your goal of paying off student loan debt.
What does it mean when a job offers student loan repayment? ›
Recurring payments – Employers repay the employee's loan in regular installments. Signing bonuses – New employees receive a lump sum payment toward their student loan balance. Paid time off (PTO) exchange – Employees swap their unused PTO for cash applied to their student loans.
What is one reason given about why student loan forgiveness is a good thing? ›
When debt burdens are lifted, student borrowers can start new businesses and in turn, create job opportunities for others. They can buy homes for the first time in their lives, pay down other debts such as their credit card bills, and have less reliance on social safety net programs.
Why you shouldn t worry about repaying your student loan? ›
If you don't earn enough, you don't have to repay. Unlike normal borrowing, which requires payment regardless of your situation, with student loans you don't need to repay them unless you're earning over a set amount. This applies even if you have started paying and then your income drops.
"Our bipartisan legislation will allow millions of students and recent graduates to continue receiving reimbursem*nt through their employer up to $5,250 per year tax-free, which can be used to repay student loans, pay tuition, and purchase required books, supplies, and equipment for academic courses.
Can I deduct student loan interest paid by my employer? ›
The deduction cannot be claimed for student loan interest that is paid by an employer and which payment is excluded from the employee's income (see Educational Assistance Programs). A worksheet in the Instructions to Form 1040 or IRS Pub. 970 is used to calculate the deduction.
Can my LLC pay my student loans? ›
Allows employers to subsidize and / or reimburse employee student loan payments. $5,250 maximum per employee. Tax deductible for employers, and excluded from taxable income from employee. Be a legitimate employee of the LLC or S Corp.
How do student loans affect your tax return? ›
One of the primary ways the government tries to help ease the mounting burden of student loans is to offer a student loan interest deduction. This deduction reduces your taxable income by the amount of student loan interest that you pay during the year, up to $2,500.
How do I get the full $2500 American Opportunity credit? ›
Be pursuing a degree or other recognized education credential. Have qualified education expenses at an eligible educational institution. Be enrolled at least half time for at least one academic period* beginning in the tax year. Not have finished the first four years of higher education at the beginning of the tax year.
Is it better to save or pay off student loans? ›
Pay less over the life of the loan: Because your student loan, like most other debt, accrues interest when you carry a balance, it's cheaper if you pay off the loan earlier. It gives the debt less time to accumulate interest, meaning you'll pay less in the long run.
What is the Cares Act student loan repayment 5250? ›
Employees are able to receive contributions toward their student loans from their employer without paying any taxes on the contributions (up to $5,250 annually), thereby enabling employees to save money on interest and pay off their loans more quickly while receiving this unique benefit.
What is the employer participation in repayment act? ›
The bipartisan bill introduced July 25 in the U.S. House and Senate, called the Employer Participation in Repayment Act, would permanently enable employers to provide up to $5,250 of annual tax-free, student loan repayment educational assistance as a voluntary benefit to their employees under IRS Section 127.
Is employer education assistance taxable? ›
You must generally pay tax on any educational assistance benefits over $5,250.
